How to Measure Software ROI of Custom Software Project: Metrics That Matter

In today’s competitive landscape, quantifying a software project’s ROI is vital for success. Businesses have to justify their technology investments with quantifiable results. ROI is critical to discover if your investment is paying off. It drives informed decision-making. A positive ROI can push a business onto the path of success and growth.

In this blog, we will understand what software ROI is and how to measure it. We will also learn about the metrics to measure and the best practices to maximize the return. 

What is Software ROI and Why Is It Important?

Software ROI is a metric that quantifies the profitability of your software investment. It indicates the financial gains from spending on software compared to earlier expenditure. Evaluating software ROI leads to informed decisions about whether to pursue the project. It also ensures the optimal allocation of resources.

Reaching a positive ROI is the main goal of any project. Below is the formula that computes the return on your investment.

ROI % = Net Profit / Cost of Investment * 100%.

Note that many factors affect ROI. Two major ones are the quality of its data security systems and user satisfaction. It’s essential to consider the factors unique to your software while measuring its ROI. This helps justify the product’s implementation. It also gives you a practical idea of its true value. 

Benefits of Software ROI

Software ROI determines if your investment pays off in the long term. Below are all the reasons why it’s so important. 

Optimization of Resources

Evaluating software ROI allows you to distribute your resources effectively. You can do this by assessing the potential benefits of various software investment options. Then, you can choose those that promise the best returns.  

Maximizing Customer Experience

Customer-centric software improves user experiences. Solutions with higher ROI increase customer satisfaction. They directly affect your customer acquisition and retention levels. 

Cost-Cutting and Potential Savings

Software ROI can tell you about the processes that can be optimized through this investment. For example, you can replace manual activities with automation. This cuts missing time because of human error and indirect labour expenditure. At the same time, you boost workflow efficiency. 

Digital Transformation

Software with a higher ROI helps with a seamless digital transformation. Custom software can increase interoperability. It makes you more competitive. 

Factors Affecting Custom Software Development Cost

1. Size & Complexity of the Product

The cost of a simple custom software without complex features starts from $200,000. Examples include a basic mobile app, a content management system (CMS), and the UI of a dashboard.

Medium-complexity custom software with more specs, integrations, and user roles costs more. The price begins from $50,000. Some examples are multi-platform apps, e-commerce systems, CRM with intricate workflow, and employee tracking systems with reporting and two-factor authentication. 

Projects with advanced features and scalability for an enterprise have the highest cost. They require extremely skilled developers and need to fit perfectly with various requirements. For example, a complex EHR system integrates with lab systems, billing platforms, and telehealth solutions. It also needs to be compliant with HIPAA regulations to protect patient data. A customized Business Intelligence (BI) tool is built as per the processes, reporting needs, and datasets of an enterprise. This requires a long development timeline and extensive testing. So, the cost of such highly complex custom software starts from $100,000.

2. Tech Stack

A technology stack not only consists of the languages and tools used, but also the availability of experts to use that tech. Some free and readily available technologies are Python, Node.js, and PHP. You can also find plenty of developers skilled in using them. This helps bring the overall development cost down.

But if your custom software needs proprietary libraries and tech, like .NET or SAP, the licensing cost will add to the expenses. Also, finding experienced developers for the same is difficult. The cost of skilled software developers differs based on the technology they are proficient in using. 

3. Design Complexity

Complex and unique UI/UX designs demand a higher budget. For instance, a mobile gaming app’s interface has a lot of assets, which need precise design and placement. It consumes a lot of the designer’s time and requires more skills to build. But a simple design with usual UI elements won’t add to the cost significantly. You can find such designs in ERPs and CMS solutions. 

4. Location and Experience of the Developers

Labour rates in different regions differ a lot. North American and Western European developers demand higher hourly rates, between $80 and over $250, than those in Eastern Europe and Asia. A developer residing in Eastern Europe will charge between $30 and $80 hourly, while one in Asia won’t charge over $60 for the same work. 

This cost difference is because of the local cost of living and wages. So, offshore or nearshore development allows you to reduce total costs. The cost of developers with varied expertise is also different. A junior developer won’t charge as much as a mid-level or senior developer.

5. Level of Integration

A key part of building custom software is integrating it with third-party apps. These can be ERP, CRM, payment gateway, billing provider, or a lab. The higher the integration need, the higher the cost. Often, developers build APIs manually for interoperability. It needs immense development time and funding. Moreover, if you want a system to connect with legacy software, be prepared with a higher budget. It’s because legacy systems are incompatible with modern software and have security and compliance issues. Developers cannot depend on any external app or third-party integration to connect them.

6. Maintenance and Support

Maintenance and support services also raise the total cost of custom software. They often account for up to 90% of the product’s lifetime cost. These ongoing costs to consider include; annual maintenance fees (typically 15-25% of the initial cost) for bug fixes, updates, and performance optimization, as well as support costs for reactive issue resolution and potential infrastructure/API fees.

Essential Traditional and Non-Traditional Metrics to Measure Software ROI

Assessing metrics for software ROI helps you make informed financial decisions. Ultimately, it ensures that the software aligns with your business goals. Typically, businesses only consider traditional metrics to measure ROI. But to get a full picture, you must consider non-traditional metrics also. In the lists below, you will find all of them.

Standard ROI Metrics

• Increased revenue: If the software causes more sales or new revenue streams.
• Cost reduction: If there is less labor (due to automation and/or more efficiency) and lower resource costs. 
• Higher customer satisfaction: If the software increases the end-user experience. 
• Time savings: If there’s less time spent on tasks and/or workflows. 
• Competitive advantage: If the software offers you an edge over your competitors.

Non-Traditional Metrics

• Adaptability and Scalability: Will the tool enable or hinder as your business expands to serve more clients?
• Employee Satisfaction and Productivity: Is there a reduction in errors and the staff’s need to rework problems? 
• Customer Satisfaction and Experience: Does the software increase user satisfaction by solving their problem? Is it easy to use? 
• Time Savings: Does the software save time and help your employees to focus on higher-level, strategic tasks?
• Compliance and Risk Mitigation: If you are in an industry where personal data is involved, does the tool provide adequate security? 

How to Calculate ROI of a Custom Software Project

To calculate ROI, you use the formula mentioned above. For ease of reading, here it is again.

ROI = (Net Benefits / Total Cost) * 100

However, you need the right numbers to put into this. Only then will this formula give you an accurate ROI. Here’s a detailed breakdown of how to do this.

Establish Costs

You first need to know how much you are investing. There are several costs in a software project. These include:

1. Development Costs

These are the expenses related to the tool’s design, development, and implementation. A custom software development company that builds design-first gives the most accurate estimate for these costs.

2. Hardware Expenditure

These are the costs that require additional technology expenses, indirectly related to the software. Suppose you are building a complex software. To develop it, you need to upgrade your team’s computers. If the software needs new hardware like this, consider those costs. 

3. Implementation Expenditure

Implementation costs accrue from everything you do to switch over to the new tool. For example, process changes and data migration. This cost becomes more pronounced when you add on to the current software. For example, adding new features or redesigning existing software.

4. Training Expenditure

Consider the expenses of training the staff to use the new tool. If you have a customer-facing software, replace the staff with your customers. 

5. Maintenance Expenditure

Software maintenance is ongoing. You must consider the expenses involved for its various aspects. These can be operational costs, licensing, bug fixes, and more. 

Establish the Benefits

Benefits include everything you can get out of the software. Typically, they include the following:

1. Quantifiable Benefits

Determine the savings and profits the tool can generate. This can be:

• Higher revenue
• Lower operational costs
• Greater efficiency. 

These benefits are more specific to internal software.

2. Qualitative Benefits

Qualitative benefits are less tangible. Some examples include:

• Better customer experiences
• Enhanced data analysis functions
• Greater regulatory compliance

To make them more concrete, assign them a numeric value. To do so, estimate their effect on customer retention, sales, and other key metrics. 

3. Return on Time Saved

Calculate the time that the new tool saves. This is applicable for both internal and client-facing products. 

Best Practices to Maximize ROI from Custom Software

You want your software project to yield concrete benefits. For that to happen, it’s important to stick to some best practices. Below are three effective strategies to boost ROI. 

1. Set Clear Objectives

Setting clear and quantifiable objectives for your project lays the basis for a positive ROI. It ensures that your project aligns with the broader business goals. When you define goals, you understand exactly how your software offers value to users. This knowledge allows you to gain insight into your target market. Thus, you can develop a product with the exact features that would enhance user engagement. 

Depending on your unique needs, your objectives can be customer interaction or increasing operational efficacy. Suppose you are creating an in-house software to enhance workflows. In this case, the goal can be to cut the processing time by 20% within a year. Setting clear metrics will help you accurately determine the project’s ROI. 

2. Continuously Monitor and Assess

Ongoing monitoring and assessment of the software lets you understand why it’s generating the given ROI. If the ROI is low, you can pinpoint the reasons behind that. Thus, you can work on them to increase the project’s return. 

This process involves continuously gathering and analyzing data related to the product’s performance. It lets you discover how closely it’s aligned with goals. As a best practice, set KPIs at the early stages of development. This enables effective monitoring. Once set, regularly review them to evaluate if the software delivers the expected value. 

As an example, suppose the software aims to boost customer satisfaction. In this case, set frequent surveys and feedback mechanisms. These will quantify user satisfaction levels. Monitoring involves assessing the scalability and security of the software. All of it helps you see if the product meets the goals set earlier. 

3. Partner With a Reliable Custom Software Development Company

To enhance the ROI, you must properly consider your initial investments. Factors like quick time-to-market and your software performance also play a role. To measure ROI accurately, analyze cost savings and revenue generation. It’s also vital to consider user adoption metrics. 

All this can be quite challenging for a business to manage on its own. 

Collaborating with a reputed software development company smoothens this process. They have specialized teams to develop and measure the project’s impact. A custom product development agency employs best practices for calculation, like ROI ratios and cost-benefit analysis. This increases the chances of generating a positive ROI for your project. 

To drive business innovation, it’s vital to measure and optimize your project’s ROI. This return is more than just meeting financial metrics. It’s an ongoing process of assessing and optimizing the software throughout its use. It ensures that your technology investments deliver real value. 

Summing Up

Imenso Software is a full-service custom software provider for startups in the US. We have been delivering solutions that provide measurable revenue gains to our clients for over a decade. Our teams develop custom software tailored to the unique needs of businesses across industries. We turn our clients’ investments into drivers of growth. Contact us today to learn how we can help you with your project success.